For most Americans, Social Security benefits account for a significant portion of their income in retirement. The decisions you make about when to file for benefits and how you coordinate your benefits with your spouse’s benefits can make a major impact on the amount you collect for the rest of your life.
Click to read: Ten things to know about your Social Security benefits
At Leelyn Smith, we work closely with our clients to analyze their situations and help them maximize the value of their benefits. In this article, we explain some of the fundamentals of how Social Security retirement benefits work. Then we look at several strategies that can be used to maximize benefits.
How Social Security works.
Social Security can be a complicated topic, so it’s important to understand how the system works and the different types of benefits.
* How Social Security benefits are determined. Your monthly benefits are based on three main factors: 1) How much you earned during your career—your 35 highest-earning years are used to determine your primary insurance amount (PIA); 2) When you file for benefits—you can file for benefits as early as age 62 and as late as age 70; the later you file, the larger your monthly benefit will be; and 3) Inflation—the cost of living adjustment (COLA) is projected to be 2.8% over the next 75 years.
* When you file for benefits is extremely important. When you file for benefits is the factor that you have the most control over, and it determines what your monthly benefits will be for the rest of your life. “Full-retirement age” (FRA) ranges from 66 to 67 depending on when you were born. Filing before FRA will reduce your monthly benefits; for example, if your FRA is 66 and you claim at 62, you’ll receive just 75% of your PIA. But if you delay your claim until after FRA, your benefit will grow 8% a year up until age 70.
* Spouses of workers are eligible for benefits. Let’s use Jack and Jill, a married couple, as an example. Jill can receive a benefit of up to 50% of Jack’s PIA, as long as they’ve been married for at least a year and Jack has already filed for his benefits. But if Jill files for spousal benefits before her FRA, she will receive a reduced amount.
These calculations get more complicated if Jill qualifies for retirement benefits based on her own earnings. In that case, if Jill files before FRA, she’ll get her reduced personal benefit plus a reduced spousal benefit. But if she waits until FRA, she can receive either 1) her full personal benefit or 2) 50% of Jack’s PIA.
* Surviving spouses are eligible for benefits. Surviving spouses can receive benefits of up to 100% of what their spouses were receiving at the time of death. These benefits can start at age 60, but they’re reduced if they’re taken before the widow or widower’s FRA. Survivors who qualify for their own benefits, however, must choose between receiving their personal benefit or a survivor benefit; they can’t collect both.
* Social Security benefits can be taxed as income. If you earn income during retirement through part-time jobs, investments, or other sources, there’s a good chance some of your Social Security benefits will be subject to income taxes. For example, a married couple with a combined income of more than $32,000 may have to pay income tax on up to 50% of their benefits, and that number gets higher for higher earners.
Strategies for maximizing your benefits.
Now that we’ve looked at how Social Security works, let examine some strategies for maximizing the amount of benefits you’ll receive over your lifetime. Because of the nature of spousal and survivor benefits, most of these strategies apply to married couples.
* Delay your benefits as long as possible. Don’t fall into the trap of thinking that you should start receiving your Social Security benefits as soon as possible. As we learned above, you can file for retirement benefits anywhere between ages 62 and 70, and the longer you wait, the more you’ll receive each month for the rest of your life.
For every year that you delay benefits after reaching full retirement age, you earn an 8% annual credit for your benefits. There aren’t many investments out there that offer an 8% guaranteed annual return. For most people it makes sense to find a way to delay claiming benefits … even if it means you have to cut back on your living expenses for a few years or liquidate other lower-returning assets.
Of course, Social Security benefits stop when you die, and how long you live past retirement—which is impossible to know—greatly determines whether it makes sense to delay claiming benefits. Our research has found that the break-even age for most people is between 79 and 83, and according to the Social Security Administration, for people who reach 65, the average life expectancy is 84.3 for men and 86.6 for women.
* Correcting past mistakes. If you started taking your personal benefit when you first became eligible at age 62, there is a way to make up for some of this lost time if you haven’t reached 70 yet. You can “suspend” (i.e., stop receiving) your benefits and earn the 8% delay credit for any years that remain between now and when you reach 70.
* “File and Suspend.” This is a strategy for maximizing a married couple’s total benefits. Remember that one spouse can’t receive spousal benefits until the other spouse has filed for his or her benefits. The “file and suspend” strategy allows the lower-earning spouse to start receiving spousal benefits while the higher-earning spouse accrues the 8% credits for delaying filing.
Here’s how this works: Assume Jack and Jill have both reached full-retirement age at 66. Jack, the higher-earning spouse, can file for his benefits at 66 but immediately suspend receiving his benefits. By suspending, this allows Jack to earn the 8% delay credit for the next four years. Then once he turns 70, Jack can begin receiving his enhanced benefit. In the meantime, Jill can begin receiving her spousal benefit at 66.
* Combining “file and suspend” and a “restricted” application. This is a strategy that can make sense when both spouses qualify for relatively high benefits based on their own earnings. Upon reaching full-retirement age (FRA), the higher-earning spouse will “file and suspend” until age 70 (as described above). Once the lower-earning spouse reaches FRA, she will file for benefits but “restrict” her application to just her spousal benefits. This allows her to receive 50% of her husband’s primary insurance amount from ages 66 to 70 while earning the 8% delay credit for her personal benefit for four years. Then upon reaching 70, she will switch over to her enhanced personal benefit.
* Filing for spousal benefits when divorced. Ex-spouses are eligible to receive spousal benefits if you were married for at least 10 years. Unlike with the regular spousal benefit, you do not need to wait until your ex-spouse files for benefits to claim your spousal benefit. As long as you and your ex-spouse are at least 62, you can claim a spousal benefit.
* Making the most of survivor benefits. When one spouse dies, the other spouse is entitled to a survivor benefit starting at age 60. The amount of the benefit is reduced if the surviving spouse takes the survivor benefit before reaching FRA. The surviving spouse must decide between taking the survivor benefit or taking her personal benefit; you only get one or the other.
If the surviving spouse isn’t entitled to a personal benefit or has a relatively low personal benefit, then the decision is easy—just take the survivor benefit. But if the surviving spouse’s personal benefit is close in size to the deceased spouse’s, then the decision becomes more difficult. If this is the case, one strategy is for the surviving spouse to claim the survivor benefit until she reaches 70, at which point she switches over to her personal benefit. This allows the surviving spouse to receive some income before turning 70 while accruing the 8% delay credits for her personal benefit.
The survivor benefit also is available for ex-spouses. If you remarry after age 60, you will still be eligible for your ex-spouse’s survivor benefit.
* Beware the Windfall Elimination and Government Pension Offset provisions. If you are eligible for a federal or state government pension, your Social Security benefits might be affected by the Windfall Elimination and Government Pension Offset provisions. These rules were added to make sure that workers with government pensions don’t receive higher benefits than workers who don’t receive government pensions.
Personalizing the decision.
As you can see, maximizing the value of your Social Security benefits can be a very complicated decision that involves many moving parts. While it is generally smart to delay receiving benefits as long as possible, the right decision for you depends on your unique circumstances.
At Leelyn Smith, we work closely with our clients to help them navigate this important decision. Using sophisticated planning software, we provide personalized recommendations for our clients based on their specific earnings history, ages, family situation, and other retirement assets. If you know anyone who could benefit from a Social Security analysis, we would be happy to help them maximize their benefits.
Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Leelyn Smith LLC, a registered investment advisor and separate entity from LPL Financial. Tax related services offered through Leelyn Smith Tax, LLC, a separate legal entity not affiliated with LPL Financial. LPL Financial does not offer tax advice or related services.